An accelerated method for calculating an asset's depreciation. This method takes the asset's expected life and adds together the digits for each year. So if the asset was expected to last for five years, the sum of the years' digits would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15.
Depreciation In Year i
= ((n-i+1) / n!) * (total acquisition cost - salvage value)
= ((n-i+1) / n!) * (total acquisition cost - salvage value)
Example:
For $2 million, Company ABC purchased a machine that will have an estimated useful life of five years. The company also estimates that in five years, the company will be able to sell it for $200,000 for scrap parts. In this case,
n! = 1+2+3+4+5 = 15
n = 5 Depreciation expense for 2nd year = ((5-2+1)/5!)*(2,000,000 – 200,000) = 480,000
n! = 1+2+3+4+5 = 15
n = 5 Depreciation expense for 2nd year = ((5-2+1)/5!)*(2,000,000 – 200,000) = 480,000
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